Celebrity and 'your own crowd' crucial to crowdfunding success, promoters say

Equitise New Zealand manager Will Mahon-Heap

UPDATED offer totals

Kiwi startup D'Arcy Polychrome is commercialising a unique technology, drikolor, that could disrupt the global decorative paint market. Yet the firm raised only half of its minimum target in a recent equity crowdfunding offer.

It's the 15th failure out of 44 public attempts to raise funds from 'the crowd' by issuing shares and offering rewards since Renaissance Brewing successfully made New Zealand's first equity crowdfunding offer in August 2014.

Analysis of offers that failed to hit their target funding shows there is more to success than just being a good or bad investment. It's not as simple as "no celebrity, no dice" but having a recognised brand, founder, or investor certainly helps.

Retail investors are attracted if someone in the management team, on the board, or a previous investor putting funds into the offer, are well-known, says Equitise New Zealand manager Will Mahon-Heap.

"People look at all of these [funding] rounds and want to see someone putting money on the line before going in themselves," he said. "That's more likely if it's someone they know."

Products-based companies and well-known brands have an edge over others as people like to have a tangible and emotional connection to the shares they invest in, he said. A good example is Invivo Wines, which was the first to raise the maximum $2 million allowed under the annual funding cap for crowdfunding offers.

Equitise has seen two out of six offers fail while D'Arcy Polychrome was the third failure on Snowball Effect, which has raised $11.92 million in 14 successful offers (not including private offers).

D'Arcy Polychrome's product, drikolor, adds colour to paint via a stir-in powder, like adding sugar to a cup of coffee. The startup raised only $250,000, half its minimum target and only a quarter of its desired $1 million to help fund a push into new channels in the US and further research and development into concrete and other materials.

While the money raised was refunded, the startup could pursue a private offer as did Mad Group, which also failed in its public offer, said Snowball Effect head of platform Josh Daniell. MAD, which has two fast-food retail chains – Habitual Fix and Mad Mex – raised only two-thirds of its $750,000 target in a public offer last June. It later raised $500,000 in a private offer to the same investors, topping up the amount it needed by extending bank debt.

Mr Daniell said there were a number of reasons D'Arcy Polychrome's offer didn't work, which also apply to others. It didn't have a recognised name in New Zealand because it's trying to sell its product offshore and it also failed to get early momentum with a credible, lead investor.

"That's what gives people confidence to go into it," he said. "It's crucial to put up some 'hurt money' [funds that make clear there's committed backing] to help validate the offer."

He said the company didn't bring its own audience, the summer holidays timing was bad, and the fact people weren't convinced by the proposition could mean the pricing was wrong.

David Wallace, director of Crowdcube, which has had two successful offers and is about to launch a third, said extending offers doesn't usually work as initial momentum is crucial.

"Those companies that have a business-to-business offering are quite difficult to get across because they don't have a crowd they can activate," he said. "The first question to ask is: 'where is the crowd going to come from?' If the company brings its own crowd, the probability of success is greater."

PledgeMe has had eight failed equity offers and raised $3.2 million in 12 successful ones.

Chief executive Anna Guenther said the company doesn't need to be a household name but is more likely to be funded if people love the brand and can relate to what it does.

Investors also want to a clear proposition about why the company needs funding and what that will help achieve, she said.

PledgeMe this week set up a new "crowdfunding university" programme, which three companies have already signed up for, providing one-on-one advice that includes how to get their own crowd engaged before an offer.

Crowdfunding platform Liftoff has made only one offer so far and that failed. It has pivoted to a partnership model that would allow partners to do their own crowdfunding campaigns on the platform while it handles the compliance aspects.

It works with those partners' startups on a range of capital raising options including angel investment, debt, and crowdfunding. Economic development agency Whanganui and Partners is one of four partners signed up so far.

Liftoff director Adam Hunt said the platform was opposed to "leading the crowd" by having a pre-arranged funder come in at the start of an offer to make it appear more popular to other investors and would make that funding public before an offer starts.

(BusinessDesk)

BusinessDesk receives funding to help cover the commercialisation of innovation from Callaghan Innovation.


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From my experience in the early stage capital raising market an overall success rate of 60 - 70% is a good achievement, to expect higher is probably unrealistic, unless the platforms are being very conservative in their selection criteria, and the level of pre-commitment lined up before going live.

The advise above is also very correct, these deals are done through the networks of the entreprenuer - my guess is that true thrid party investment would make up less than 35% of the funds raised - stand to be corrected on this.

What is however noticeable is that the momentum of the market has slowed - probably again to be expected - but unless there is an upswing in activity then the viability of some / all of the platforms will come into question and that would be a shame, as they bring a new dynamic to the market.

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Having a recognised investor in early makes the difference proving up the pre-money value and likelihood of execution success, yo retail pynters. Suggesting it is a "celebrity" response devalues the fundamentals of having that person(s) in at that value and offering.

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NZ Venture Investment Fund and Pacific Channel PArtners are investors in D'Arcy Polychrome - so they have the "experienced" investor which obviously did not work in this case. Maybe the issue is that they have an incentive to "inflate" valuation to improve their existing investment rather than to do a reasonable deal for what will be a smaller investment this time.

It would pay new investors to also understand the incentives of existing investors even if they do invest in the new round.

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